Bendigo Bank results preview surprises, as analysts warn of dividend, earnings pain for banks

Bendigo Bank surprised with a better-than-expected earnings update but analysts say sharemarket valuations for Australia’s listed banks are increasingly ‘hard to justify’.

Australia’s banking sector is facing a tough time ahead, but Bendigo Bank surprised market watchers with a better-than-expected earnings update. Picture: Roy VanDerVegt

Analysts have described Bendigo Bank’s profit update, which showed a 2.3 per cent dip in after-tax earnings to $464m for the 10 months to the end of April, as a ­return to “realistic” results.

But banking sector observers say sharemarket valuations for Australia’s listed banks are increasingly “hard to justify”, adding they are facing challenging conditions and a likely pullback.

In an earnings update on Friday, Bendigo Bank revealed its performance ahead of an investor day in May and its full-year earnings update in August.

It reported its net interest margins had recovered from the bank’s first-half 1.83 per cent levels to 1.87 per cent in April.

The bank said its credit expenses were also at low levels across all portfolios.

The update came as Bendigo Bank made its Basel 3 filings, revealing a look at its books through to the end of March, with chief executive Marnie Baker noting the update showed the impact of “our commitment to managing the business for long-term value”.

“We have continued our focus on disciplined growth and prudent management of our costs,” she said.

Citi analysts said Bendigo Bank’s update showed earnings “materially above” industry estimates, and the bank’s lending margins looked set to recover to about 1.9 per cent “at a more ­realistic level”.

Citi analyst Brendan Sproules said the positive update would see earnings expectations for the bank lifted by 6.5 per cent.

Mr Sproules said asset quality was “still benign” at Bendigo Bank, while the $10m bad and doubtful debt charge in the first half suggested a “small print due to low actual stress”.

But Mr Sproules said Citi expected “similar difficult core earnings growth trends from here” for Bendigo, reflecting a gloomy outlook for banks.

In a note to investors, Macquarie analysts said bank valuations were “hard to justify”, noting their current levels were set against “the backdrop of the underlying earnings trends” that saw pre-provision earnings slump by as much as 4 per cent.

Macquarie said that, although banks reported positive balance sheets and were enjoying favourable economic conditions and business lending growth, they were overvalued.

Macquarie said profits were facing headwinds from pricing pressure in mortgages and deposits, combined with a rebound in expenses growth.

“With declining pre-provision profits and potentially higher impairment charges, we believe it will be challenging to maintain the current level of dividends,” Macquarie said.

Analysts said ANZ, NAB and Westpac were all exposed to a fall in dividend yields from 5-6 per cent to 4 per cent.

But Morgan Stanley analysts said banks were likely to cushion any blow to earnings due to a war chest of provisions for bad debts they had hoarded over past years, which could be used to soak up losses and support returns.

In a note to investors, Morgan Stanley analyst Richard Wiles said there was too much optimism about the banking sector, calling out a number of negative drivers that were likely to cruel returns in the coming years.

The Morgan Stanley note points to the 10 per cent quarter-on-quarter increase in non-performing loans in the March period, despite credit quality generally remaining sound.

This was coupled with a lift in provisions, which now sit 30 basis points above pre-Covid levels, with a forecast from Morgan Stanley of a fall of only 15 basis points by 2026.

Mr Wiles said the banks did not bring forward provision releases, despite this, and it was likely the lenders would now lean on their excess provisions to mitigate earnings impacts from higher underlying loan losses in the year ahead. He said this would support loan growth and maintain their buffers over two to three years.

Originally published as Bendigo Bank results preview surprises, as analysts warn of dividend, earnings pain for banks